US Airways, United in Talks

Renewed Courtship by the Two Carriers Would Create Nation's No. 2 Airline

By

Dennis K. Berman,

doug Cameron And

Susan Carey

Updated April 6, 2010 12:01 a.m. ET

UAL Corp.'s United Airlines and US Airways Group Inc. have resumed discussions of a potential merger that would create a global behemoth, people familiar with the matter said Wednesday.

The talks are the latest in a decadelong dance between the two big airlines and have recently heated up after months of off-and-on conversation, these people said. The talks aren't that far along and could falter again, these people said.

ENLARGE

A United Airlines jet crosses paths with a US Airways jet at Newark Airport in 2001.
Bloomberg News

The companies haven't seriously discussed how a deal would be structured, though it probably would involve a stock swap because neither wants to deplete its cash, said one person familiar with the talks. The two carriers declined to comment. Much remains undecided, including which CEO would run the combined company.

Chicago-based UAL is the third-largest airline in the U.S., by traffic, and US Airways, Tempe, Ariz., is the sixth. A merger would create the nation's second-largest air carrier behind Delta Air Lines Inc., which merged with rival Northwest in 2008. The new carrier would combine United's strength on trans-Pacific flights and its five domestic hubs with US Airways' large presence on the East Coast and its hub in Phoenix.

A Turbulent Deal

United and US Airways, along with the rest of the industry, have lost money over the past couple of years as oil spiked to a record high in 2008 and then the recession walloped travel demand in 2009. But in recent months, industry revenues are rebounding, albeit from double-digit, year-over-year declines at the nadir last year.

While both United and US Airways are expected to post losses in the first quarter, analysts expect them to be narrower than in the first quarter of 2009. Both companies are reporting strong revenue gains in recent months as fares firm, business travelers return to the skies and airlines benefit from having cut their capacity.

The recent talks were first reported by the New York Times.

The airlines have flirted with mergers a few times in recent years. They aborted a deal in 2001 after unions protested and antitrust enforcers threatened to file a lawsuit to block a deal.

A renewed effort two years ago ended after United decided to pursue a marketing alliance with Continental Airlines Inc. instead.

Houston-based Continental had turned down United as a merger partner earlier in 2008, but with their marketing alliance, the two now are reaping some of the revenue benefits of a merger without the risks.

Union obstacles to U.S. airline mergers are considerable, even if the labor unions can't block deals outright. Infighting over how seniority will be aligned in a combination can set back customer service and poison labor-management relations for years.

US Airways, itself the result of a 2005 merger of the old US Airways and America West Airlines, still hasn't been able to combine its pilot and flight-attendant ranks because the unions won't agree on seniority. And US Airways pilots have a stipulation in their contract that would raise their wages back to pre-bankruptcy levels if a merger occurs that would trigger a change of control—another aspect United and US Airways would have to confront.

Mr. Parker, who ran America West when it acquired the old US Airways out of bankruptcy, made an unsuccessful hostile bid for Delta before the Atlanta-based carrier acquired rival Northwest.

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Mr. Tilton in his seven years at United has looked at merging with a number of carriers.

Continental was widely regarded as a better strategic fit than US Airways, but Continental's then CEO, Larry Kellner, decided his company would be better off remaining independent. Jeff Smisek, his successor, has said he might change his mind about mergers if Delta uses its size to outpace the rest of the industry.

Some in the industry think the rekindled talks are an effort by United to tempt Continental back to merger talks. A combined United-Continental would leapfrog Delta as the world's largest airline by revenue. A Continental representative declined to comment.

Lawmakers in Washington, where both airlines have overlapping operations, probably would push for close antitrust scrutiny of any deal.

Regulatory approval of the Delta-Northwest deal in 2008 appeared to pave the way for further consolidation in the U.S. But antitrust enforcers in the Obama administration could prove tough to persuade. They've said they intend to give mergers even closer scrutiny and have opposed airlines' efforts to secure antitrust immunity deals for their marketing alliances.

After the antitrust rebuff in 2001, "it can't just be try, try again," said J. Bruce McDonald, a former deputy assistant attorney general who served in the Justice Department's antitrust division and is now at the law firm of Jones Day.

"The same DOJ lawyers who investigated it the first time will [have] to be convinced that something has changed."

US Airways stock shot up 26% in after-hours trading on word of the talks, reported on the New York Times Web site. UAL shares rose more than 8%.

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